Anyone who owned a home a decade ago knows a little something about how housing values can fluctuate.
Prior to 2006, most U.S. homeowners thought home values went only one direction: up. Sure, some years prices moderated, but generally, they went up 3 percent to 5 percent, and in some years, like in 2004, 2005, and 2006, they went way up. Few expected values would crash by 30 percent to 50 percent (or more!), as they did from 2006 to 2011. Homeowners are now just recovering from the debacle known as the bursting of the housing bubble.
We can blame both the run-up in home values in the early 2000s and the decline from 2006 to 2011 on “easy” credit. Lenders, supported by politicians with the notion that homeownership was good for everyone, eased credit requirements and lowered down payments for homebuyers. Blemished credit mattered less than it previously had, and thus more people qualified to purchase homes than had previously been able to qualify.
In the early 2000s, you may even recall driving around and seeing signs advertising “no money down” in front of new home communities; these signs were plentiful. The so-called “subprime” mortgage was made to buyers that had, as the term itself suggests, lesser quality credit than “prime” buyers. To further accommodate these buyers, many lenders lowered down payments or eliminated the requirement altogether. Why would subprime mortgages be problematic, after all? Home values had only gone up for decades upon decades.
Lenders seemingly “learned” something as the housing bubble burst, as they took back homes. Giving loans to subprime buyers was a lot riskier than approving loans to prime buyers. Further, buyers with little to no equity in their biggest investment were far more likely to default on repayment than buyers putting down 20 percent or more of the cost of a home when buying.
From 2008 to 2012, the mortgage industry reeled as it repossessed hundreds of thousands of homes and resold those homes at prices lower than the mortgage debt remaining on the loans they had placed. Lenders, in turn, made it a lot tougher to attain a home loan, increasing FICO-score requirements and down payment requirements. They checked and double-checked income and debt, trying to limit downside risk.
The mortgage market is again undergoing change. Home prices have been appreciating for several years now, and lenders are again easing mortgage underwriting standards and lowering down payment requirements. We are not, though, back to the heyday 2000s.
Attaining a mortgage is certainly easier to attain than it was six years ago, but it is harder to secure than it was in 2005. Documentation requirements are more significant and FICO scores must be higher than was required back then. Getting a loan with no down payment is certainly possible, but even this is more difficult to find; more likely, a buyer purchasing a home under $294,515 in most Arizona areas will find an FHA loan attractive with a 3.5 percent down payment. Most lenders now require at least 5 percent down to purchase. Exceptions exist but you will not see the billboards advertising “no down payment” as you drive around new home communities these days.
With housing prices rising and mortgage rates still low (by historical standards), it is a great time to consider buying a home, but don’t expect to do so with poor credit and no down payment. Lenders seem to be wiser from their experience. Thank goodness!
Jim Belfiore is president of Belfiore Real Estate Consulting.
Jordan Rose is president of Rose Law Group.